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Home Publications Blogs Beat the Press WaPo Does Mind Reading on President Obama's Motive for Privatizing Fannie and Freddie

WaPo Does Mind Reading on President Obama's Motive for Privatizing Fannie and Freddie

Friday, 08 August 2014 04:57

It's great that the folks at the Washington Post are capable of mind reading. If we just looked at the substance of the Johnson-Crapo bill for replacing Fannie Mae and Freddie Mac by a system in which private companies would be able to issue mortgage backed securities that carried a government guarantee, we might think that the motive was to increase the profits of the financial industry. After all, the industry would be able to earn tens of billions in additional profits each year by getting this business. 

However the Post told readers:

"To avoid a repeat of the bailout, the Obama administration is pushing to dismantle Fannie and Freddie and shift the risks of mortgage lending away from taxpayers to the private sector."

Since the bill doesn't actually avoid a repeat of the bailout, most readers would probably not realize that this is the motive of the Obama administration in privatizing Fannie and Freddie. Under the Johnson-Crapo bill,  the government would be on the hook for 90 percent of the face value of mortgage backed securities (MBS). As was the case in the housing bubble years, private issuers would have incentive to issue MBS of dubious quality, since they make money on the issuance. The big difference between the Johnson-Crapo system and the one in place during the bubble years is that the issuers would be able to tell buyers that the government is covering 90 percent of their investment. In the bubble years, investors understood that if the MBS went bad they could in principle lose their whole investment. 

Comments (15)Add Comment
90% vs 80%
written by Robert Salzberg, August 08, 2014 5:17
In general, to avoid extra mortgage insurance and for Fannie to buy up your mortgage from the bank, you need to have paid at least 20% of the principle.

So the new law is decreasing the relative risk for banks and financial companies just on the raw percentages.
In other words
written by ifthethunderdontgetya™³²®©, August 08, 2014 7:47
Johnson-Crapo will make another bubble more likely.

The WaPo loves the fiction that Obama is a liberal (Fred Hiatt wrote an editorial calling him "the most liberal President ever). And that the truth/good policy/pleasing Dave Broder's ghost is always somewhere between the two parties.

But it isn't so. (Except for the part about pleasing Dave Broder's ghost.)
Robert Salzburg, here are the current Fannie Mae UW guidelines
written by ifthethunderdontgetya™³²®©, August 08, 2014 8:03

I was never a single family home underwriter (and haven't been any kind of underwriter for a couple years), but I read that as the minimum down payment being 5% for a qualified Fannie Mae mortgage on primary residence purchase.
Terrible plan!
written by Dave, August 08, 2014 8:26
This plan is a terrible plan!

However I disagree that lenders were on the hook for the entire value of the mortgage before. This was only true if the entire housing market didn't down down, which it did. Given that, there wasn't much risk involved since equity and insurance could pay for the difference between the mortgage value and the foreclosure sale value. The problem was systemic risk, and this new plan does very little to eliminate that, in fact it probably makes it worse while putting more of the individual risks upon the government.

This is an awful plan! I have come to realize that Obama is economically illiterate.
written by Bill Maloni, August 08, 2014 10:27
Outrageous giveaway to the big banks--which just 7 years ago did far more damage with their non-Fannie and Freddie Private Label Mortgage Backed Securities (PLS)--which produced almost four times the losses that F&F did.

Introduces confusion and complexity--another mortgage regulator on top of the existing bank mortgage regulators, which didn't do their job in 2006 and 2007-- to a mortgage model that is simple, standardized, and efficient for reasons mostly related to accepting a flawed mainly GOP allegory about F&F, i.e. "they were responsible for the 2008 meltdown."

Congress refuses to admit that it would be easier and more productive to fix F&F, which have had virtually all of their flaws cured through aggressive regulation.

It's criminal to talk about the Corker Warner Johnson Crapo bill taking between 5 and 15 years to implement and typical of a do nothing, partisan, group of no-nothings.

And don't get me started on the absence of anything in that legislation which would compel lenders to make affordable mortgage loans. No mandates whatsoever (which is why the "progressive D's" wouldn't endorse it)!
written by djb, August 08, 2014 10:30
so the new bill is worse than the way fannie and freddie were previously configured
LBJ privatized F&F...
written by pete, August 08, 2014 10:36
To hide the debt, LBJ "privatized" them a long time ago. Clearly, the debt was owed by the U.S., and F&F were indeed bailed out by taxpayers. This was an indirect transfer from US to homebuilders, the true beneficiaries of the boom. I don't see how changing this to private banks with the same U.S. guarantees is different. F&F clearly got over levered. Now, eliminating the U.S. guarantee, and forcing folks to have mortgage insurance, might prevent yet another bubble. Instead this morning I heard they are yet again going to let homebuyers get artificially higher credit ratings...back to relaxations from the 90s which F&F lobbied for. Sigh...
written by skeptonomist, August 08, 2014 10:50
The Fed bailed out the MBS market by buying up about a $trillion worth in QE1 and more later (current total $1.67T). As far as I know these were only Fannie and Freddie but this must have helped other MBS's. What would the Fed buy next time under Johnson-Crapo or anything else?
The Neoliberal Belief in Markets Lives!!
written by sherparick, August 08, 2014 12:32
The Obama administration did say this was their intent, to minimize taxpayer risk will "insuring wide access to credit" in their report. http://www.treasury.gov/initia.../Reforming America's Housing Finance Market.pdf

That this was put together by officials coming form and going back to Goldman Sachs and such might have influenced what they thing was the public interest.
Sherparick, your link broken. The problem isn't vague neoliberalism
written by jaaaaayceeeee, August 08, 2014 5:34
There is plenty of corporatese in the old 2011 treasury dept initiatives-reforming-americas-housing-finance-market pdf to offend (bottom of page 12 is a perfect example). But Dean Baker has repeatedly pointed out the problem is not just AP and WaPo reporting that up is down, but bills to increase risk to taxpayers and subsidize the profitability of mortgage backed securitization, like Johnson-Crapo - see Baker's recent, more detailed write up:
Clarification of 90% vs 80%
written by Robert Salzberg, August 09, 2014 2:24
My bad. I should have said that either a 20% down payment or additional mortgage insurance generally limits the maximum risk to Fannie to 80% of the loan. Of course, underwater mortgages are an exception but we're talking big picture percentages comparing now to the proposed 10% risk President Obama is proposing.
If the USA has built up since a large financial sector, why have government insurance?
written by John Wright, August 09, 2014 10:03
One can suggest the political leaders would channel Alan Greenspan and suggest the bloated USA financial industry can handle the pricing risk of long term mortgages.

Why build up a large financial industry if the industry can't adequately price risk and allocate capital to the USA housing market without government support?

And if home ownership is truly a highly leveraged, but can't lose, investment, why does the financial industry require ANY government insurance for its MBS.

The thrust of the USA political class's home ownership policy seems to be to make (keep?) Americans as docile workers, desperately holding onto their jobs as they struggle to make their mortgage payments.

And now the political class wants government insurance for MBS to amp up this policy.

America needs more, and better jobs, not more poorly employed homeowners.
Government As a Co-signer?
written by Larry Signor, August 09, 2014 1:18
Why should the government guarantee every mortgage in America? At present, the guarantee is implicit but not mandated. The Johnson-Crapo bill would legislate and mandate this guarantee. The real question is why is mortgage risk so much more important than other types of credit risk? It must have a lot to do with who owns the risk and their political influence. The plutocrats really need to grow up and play by the same rules as everyone else.
Who wants this?
written by Scott Dunn, August 10, 2014 6:09
Opensecrets.org says that the securities and investment industries made the largest campaign contributions to Johnson and Mike Crapo, with each totaling more than $400k.
Note the reason some Democrats are opposed to Johnson Crapo
written by John Wright, August 10, 2014 11:37

Following the links in the original WP article brings the reader to

And sadly, the reason given for six Democrats not embracing the Johnson-Crapo bill is "The lawmakers were concerned that the bill did not do enough to encourage lending to people with low or moderate incomes, according to Capitol Hill aides who are not authorized to speak publicly about the matter."

So the Democrats are not complaining about the Johnson-Crapo requirement that the US government insure 90% of the value of mortgage backed securities.

The article also stated:
"Some House Republicans immediately criticized the plan for keeping the government involved in the housing finance system, albeit in a more limited role. But the White House was equally quick to support the initiative, calling it a “good-faith compromise.”

So the White House is supportive of Johnson-Crapo federal government 90% backing of mortgage backed securities.

It seems Democrats and Republicans are largely owned by the Real Estate and Financial industries.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.